New York, October 06, 2020 -- Moody's Investors Service ("Moody's") has today
confirmed the B2 issuer rating of the Government of Tunisia and changed
the outlook to negative. Moody's has also confirmed the Central
Bank of Tunisia's B2 senior unsecured rating, (P)B2 senior unsecured
shelf rating and changed the outlook to negative. The Central Bank
of Tunisia is legally responsible for the payments on all of the government's
bonds. These debt instruments are issued on behalf of the government.
This concludes the review for downgrade initiated on 17 April 2020.
The confirmation of the B2 ratings reflects the resilience of the foreign
exchange reserve buffer observed since the opening of the review,
as a backstop for maturing external liabilities over the next year.
The installment of a new technocratic government in September supports
Moody's assessment that Tunisia's institutions and governance
will contribute to policy continuity, likely to be reflected in
medium-term fiscal and economic reform implementation under a new
IMF program. In turn, indications that monetary and fiscal
policy will continue to be aimed at containing Tunisia's external
and fiscal imbalances will support access to official and market financing.
The negative outlook reflects the economic, financial, social
and political challenges the government faces in implementing fiscal consolidation
and structural reforms required to secure official support and maintain
confidence-sensitive funding options as refinancing risks prevail
ahead of upcoming eurobond maturities. While Tunisia's institutions
have built a track record of maintaining policy direction and some progress
in implementing reforms, governance weaknesses and social challenges
have also contributed to slow progress.
Tunisia's local currency and foreign currency long-term bond and
deposit ceilings remain unchanged: the long-term local currency
bond and bank deposit ceilings at Ba2, long-term foreign
currency bank deposit ceiling at B3, and the foreign currency bond
ceiling at Ba3. The short-term foreign currency bond and
bank deposit ceilings remain unchanged at Not Prime.
RATINGS RATIONALE
RATIONALE FOR THE CONFIRMATION OF THE B2 RATING
CONTINUED ACCUMULATION OF FOREIGN EXCHANGE RESERVES PROVIDES BACKSTOP
FOR SIGNIFICANT EXTERNAL MATURITIES FROM NEXT YEAR
Over the first eight months of this year Tunisia's external accounts
have adjusted in a more balanced way to the pandemic than envisaged when
the review for downgrade was initiated and financial market turmoil at
the time implied. Foreign exchange reserves have continued to increase,
reaching 4.7 months of imports.
While current account receipts have declined sharply over the first eight
months of this year in light of pandemic-related lockdown measures,
imports and other current account payments have declined by more,
leading to a narrowing current account deficit to a cumulative 5.0%
of full-year GDP over the first eight months of this year compared
to 5.9% of GDP over the same period last year, alleviating
pressure on the balance of payments.
Net foreign assets have increased to $7.7 billion (141 days
or 4.7 months of import cover) in September 2020 from $6.9
billion in December 2020 (109 days or 3.6 months of import cover).
These recent developments support the view that the shift in monetary
policy towards more effective support of macroeconomic stability,
observed over the past two years is maintained. The commissioning
of the Nawara gas field and pipeline in February 2020 will also support
a permanent narrowing of the current account deficit by substituting for
gas imports of about $500 million (1.3% of GDP).
A resultant higher FX reserve buffer serves as backstop for the significant
external debt service payments due from next year, with 2021 maturities
including two USAID-guaranteed eurobonds of $500 million
each and a Qatari loan installment at $250 million.
Moreover, because of the high foreign currency share of total government
debt at almost 75%, Tunisia's debt trajectory is highly
sensitive to adverse currency movements. As a result, preserving
external stability has significant implications for Tunisia's debt
sustainability.
INSTALLMENT OF TECHNOCRATIC GOVERNMENT IMPROVES PROSPECTS FOR POLICY CONTINUITY
AND MEDIUM-TERM REFORMS UNDER AN IMF PROGRAMME
The installment of a technocratic government led by Prime Minister Hichem
Mechichi on 2 September supports Moody's expectations of policy
continuity and paves the way for medium-term reforms under the
umbrella of a new IMF program over the remainder of this year, supporting
continued access to official external funding sources and supporting the
restoration of international capital market access at affordable terms.
Tunisia's institutions have demonstrated a track record of successful
democratic transition with the support of civil society organizations
that continue to participate in the political and policy discourse.
While fiscal and economic reform progress has been slow, pluralist
participation in policymaking supports continued progress towards reform
implementation, sufficient to catalyze official funding and secure
market financing.
Beside stated intentions to enter a new IMF programme, the government's
priorities include the consolidation of public finances and the expansion
of the sovereign's funding sources; the implementation of public
sector reform including efficiency enhancements at state-owned
enterprises; the preservation of households' purchasing power
and the maintenance of social stability, including via targeted
income support for qualifying households.
As explained below, this programme will be challenging for the government
to deliver on. Nonetheless, Moody's assesses that it
provides continuity in directing policy towards mitigating Tunisia's
fiscal and external imbalances.
CREDIT PROFILE CONSTRAINED BY A HIGH AND RISING DEBT STOCK
The B2 rating captures risks associated with Tunisia's elevated
debt burden, structural policy constraints, and slowing trend
growth.
Taking into account weaker revenues as a result of the pandemic shock,
Moody's expects the fiscal deficit to widen to 7% of GDP
in 2020, followed by 4.5% in 2021 from 3.6%
in 2019. Moody's expects Tunisia debt burden to increase
to over 80% of GDP in 2020 and stabilize within the 80-85%
range around 2024.
Reliance on concessional financing helps mitigate the impact of a higher
debt burden on debt affordability. While debt affordability will
deteriorate because of lower revenue and an increasing interest bill,
it will be in line with peers as indicated by an interest payments/revenue
ratio of 14% in 2024.
However, a number of structural weaknesses weigh on public finances
including a large public-sector wage bill amounting to over 15%
of GDP, which remains to be addressed over the long term; energy
subsidies that are being phased out (with a 2022 target), and government
guaranteed debts of SOEs amounting to about 16% of GDP (mostly
in foreign currency) representing sizable contingent liabilities.
Moody's expects pending SOE reforms will form part of any new IMF
programme.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the economic, financial, social
and political challenges the government faces in implementing reforms
required to secure official support and maintain confidence-sensitive
funding options as refinancing risks emerge ahead of upcoming eurobond
maturities starting 2021.
With gross borrowing requirements of 14% of GDP, Tunisia
remains reliant on both continuing official sector support but also confidence-sensitive
capital market funding. The newly-instituted government's
policy effectiveness has yet to be proven. Achieving fiscal consolidation
amid subdued growth will be difficult.
Over the longer term, the inability to boost trend growth entails
the risk of increased social instability, which would further dent
prospects for fiscal consolidation. Moody's expects the economy
to contract by 6.5% this year as a result of the coronavirus
outbreak, followed by 4% growth in 2021 and a return to the
2-3% range thereafter. The pandemic exacerbates a
decline in trend growth over the past decade. The government's
high debt ratio constrains scope for a rapid increase in public investment
as a means to boost growth potential. In turn, GDP growth
remains insufficient to significantly expand employment, particularly
for young graduates, increasing the risk of social discontent.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are material for Tunisia's credit profile
because the effects of climate change can significantly impair economic
growth and development. Coastal regions account for 80%
of total output and most are exposed to rising sea levels. Climate
variability, erratic precipitation patterns and severe droughts
pose significant threats to Tunisia's Agricultural sector, which
accounts for more than 15% of total employment.
Social considerations are material for Tunisia's credit profile.
In recent years, social tensions have increased in response to fiscal
adjustments under the prior programme with the IMF and in response to
persistently slow growth and employment trends. The threat of social
unrest can affect the government's capacity to implement reforms.
Moody's views the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. For Tunisia, the shock materializes primarily
through a sharp tightening in financing conditions and a drop in tourism
revenue and growth.
Governance considerations are material for Tunisia's credit profile and
relate to the administration's track record of functioning even during
times of social unrest and major societal and political change.
The country's consensus-building governance orientation has
been instrumental in securing the successful democratic transition with
all stakeholders involved, but can slow the policy decision-making
process. Tunisia's governance is impeded by relatively weak
policy effectiveness. In particular, fiscal policy while
maintaining a prudent direction in recent years has been slow at addressing
the government's high and rising debt burden.
GDP per capita (PPP basis, US$): 12,661 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1% (2019 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.9%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -3.5%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -8.5% (2019 Actual)
(also known as External Balance)
External debt/GDP: 94.8% (2019 Estimate)
Economic resiliency: ba2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 01 October 2020, a rating committee was called to discuss the
rating of the Government of Tunisia. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutions and governance strength, have not materially changed.
The issuer's governance and/or management, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The systemic risk in which the issuer
operates has not materially changed. The issuer has become increasingly
susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook a rating upgrade is unlikely in the foreseeable
future. The outlook would likely be changed to stable if Moody's
concluded with sufficient confidence that, over the medium term,
the coronavirus shock will not materially alter Tunisia's external position
and ability to access official and capital market funding to meet its
upcoming debt service payments at affordable costs.
Conversely, a downgrade would be likely if delays in the availability
of or marked increases in the cost of external funding became increasingly
likely, potentially related to a more significant deterioration
in Tunisia's fiscal and external accounts than Moody's currently
assumes. This scenario could also unfold if delays in the negotiation
of a new IMF program and/or insufficient progress on agreed reform implementation
were to occur. A renewed outbreak of social unrest that undermines
the government's capacity to stabilize Tunisia's fiscal accounts
and debt dynamics would also put negative pressure on the rating.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
